For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

All investing is subject to risk, including possible loss of principal.

It would be a mistake to overstate its importance. A modern-day Rip Van Winkle could probably set up a globally diversified stock-and-bond portfolio, sleep for 20 years, and awake to be hailed as the greatest investor of his era.

But most of us live in the real world. We’re buffeted by headlines and vulnerable to emotion. We can benefit from an outlook that paints a picture of longer-term trends in the global economy and how those trends will influence the markets.

Consider three episodes from the first half of 2016, when a probabilistic perspective on the long term helped us put alarming headlines in context, maintain reasonable expectations, and remain focused on our goals.

The Chinese new year

In the first trading days of 2016, Chinese stocks fell sharply, prompting upheaval around the globe. The proximate causes were weakness in the Chinese currency, a decline in manufacturing activity, and a communication breakdown between policymakers and markets as regulators introduced new stock market circuit breakers, or temporary trading halts. By mid-January, the MSCI AC World Index, a measure of global stock markets, had lost more than 8% of its value.

The bigger fear was that China might be headed for a hard landing, a recession that would smother global growth. Vanguard’s analysis suggested that a hard landing was less probable than a moderate slowdown. We noted that investors could expect periods of panic as China continued its transition from an investment- and export-oriented market to an economy driven by consumption and services. But the odds of a collapse that would alter the long-term outlook were slim.

By the end of June, the index had recovered its earlier losses to post a modest gain for the first half of 2016.

Since the end of the global financial crisis, bond yields have plumbed bewildering lows. Our instincts tell us that yields have to rise, simply because they’ve never been so low. In 1981, the 10-year U.S. Treasury note yielded more than 15%. In late August, it yielded about 1.5%. Nowhere to go but up, right?

During the past year, bonds have played this role to perfection, most recently in the wake of the June 23 decision by U.K. voters to leave the European Union. The next day, as global investors reacted to the Brexit vote, global stock markets returned about –5%, as measured by the MSCI AC World Index. The Barclays Global Aggregate Bond Index, by contrast, returned about 0.5%.

At their historically low yields, bonds can’t provide the same magnitude of offsetting returns that they have in panics past, but they remain an effective diversifier.

What matters the most is longer-term trends. These trends reflect slow-moving forces such as globalization, technology adoption, and demographics. When changes occur—the fall of Communism, the rise of the internet, and accelerating globalization in the 1990s—they unfold gradually, not in a single headline.

Joe Davis

Joseph H. Davis, Ph.D., is a principal and Vanguard’s global chief economist. He is also global head of Vanguard Investment Strategy Group, whose investment research and client-facing team conducts research on portfolio construction, develops the firm's economic and market outlook, and helps oversee the firm’s asset allocation strategies for both institutional and individual investors. In addition, Mr. Davis is a member of the senior portfolio management team for Vanguard Fixed Income Group. Mr. Davis frequently presents at various investment forums and has published studies on a variety of macroeconomic and investment topics in leading academic journals. Mr. Davis earned a Ph.D. in economics at Duke University.

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For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

All investing is subject to risk, including possible loss of principal.

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